Hello, this is Kyung-Hwa from the Economics Issues. The ongoing strength of the dollar and the prolonged Middle East conflict are increasing uncertainty in the investment environment. Recently, funds in the market have been flowing into bonds. Expectations of a rate cut in the U.S. by the end of the year are reigniting the enthusiasm for bond investments. Today's economic issue is whether bond investment is safe in this era of uncertainty. Personal bond net purchases amounted to 37 trillion 5620 billion won in 2023, eight times higher than two years ago. In April of this year, personal bond net purchases reached a record high of 4 trillion 700 billion won on a monthly basis. In April, the first slowdown in consumer prices this year raised expectations of a rate cut. Hello, this is Nayeon from the Economics Issues. As uncertainty in the investment environment grows, bonds are gaining attention as a relatively safe asset. According to the Financial Investment Association, personal bonds...

Net purchases of bonds surged from 4 trillion 567.5 billion won in 2021 to 20 trillion 613 billion won in 2022, and further increased to 37 trillion 562 billion won in 2023. In just two years, the figure swelled by over eight times. Individual bond purchases have been ongoing for a long time. Up to last April, 15 trillion 978 billion won was bought, and in April alone, a record high monthly net purchase of 4 trillion 700 billion won was achieved. Bonds are less accessible to individual investors compared to stocks due to limited liquidity in the market, but as bond interest rates reached their highest levels of the year, buying pressure intensified. Domestic asset management companies have been heavily investing in bonds for a long time. The net purchase of domestic bonds until April amounted to 66 trillion 178 billion won, a 21.1% increase compared to the same period last year. The inflow of funds into bond-type funds was largely influenced by the interest rates and expectations of the U.S. Federal Reserve.

It is evaluated as having an effect. In the United States, the Consumer Price Index (CPI) for April showed the first slowdown this year, raising expectations for a rate cut in September. In response, commercial banks are quickly introducing ETF trust products investing in U.S. Treasury bonds, and the sales balance of U.S. bond products is steadily increasing. Can bond investments be a safe alternative in times of uncertainty? We invited experts to discuss the safety of bond investments in times of uncertainty. We have Professor Soo Jun-sik from Sookmyung Women's University with us. Hello. Hello. Recently, there has been a lot of interest in bond investments in the investment market. It is said that the amount of money flowing into bonds in the past 1-2 years has increased significantly. This kind of enthusiasm is

What background led to this? I have been thinking about dividing it into one or two main reasons. First, we have been in a low-interest rate era in the 2010s. We were used to interest rates of 1% and 2%. Suddenly, interest rates of over 4% started to appear. People are expecting that these rates will only decrease in the future and we will go back to the old times. There is a considerable expectation for this. Therefore, there are quite a few people who invest with the expectation that if they buy bonds at high interest rates, they will make money when the rates fall later. Secondly, in recent years, the money flowing into real estate, which accounts for about 70% to 80% of our country's assets, has decreased significantly. Due to this decrease, some of this money is likely to move towards the capital market. This process also affects bond investments.

I always have this kind of thinking. When the professor gives a lecture now, it may be a little confusing for the viewers. Many people are asking such questions. They think that if interest rates decrease, bond popularity increases. Normally, when interest rates drop, people may not buy bonds, thinking that they are like deposits. So, how should we understand the relationship between deposits and bond prices? Generally, when bond interest rates decrease, bond prices rise. This is the correct expression. In fact, when bond interest rates in the market decrease, the price of the bonds you hold increases. The difference between deposits and bonds is that bonds have a price because they are traded.

There is price fluctuation based on its value, and that's the difference between deposit and what is traded in the market. Therefore, as the value fluctuates, the price changes. But how does it change? My father put emergency funds of 100 million into a deposit with a 5% interest rate. Now, the deposit we hold is a 5% interest deposit. The next day, I went to the bank again, and I found out that the interest rate of the 1-year maturity deposit I had joined had dropped by 4%. It means the market interest rate has dropped. The market interest rate refers to all the interest rates traded around. So, even though I have a 5% deposit, in the market, it dropped by 4%. Would that make me feel good or bad? It would be great, right? It feels good. In fact, when it comes to deposits, you cannot just sell them.

It's just a matter of feeling good, but when it comes to bonds, you can think of it as the price rising as much as the interest rate has fallen, as you feel good. So, how much did it rise? If you put 5% in a deposit and the interest rate fell by 1%, then on 100 million, 1% of that for one year. If you put it in a 3-year deposit, then for those 3 years, since it's one year's worth, and a day has passed in that one year, subtract that day's worth, and the price has increased by that much. So, in reality, as the price goes up as much as you feel good, when the interest rate goes up, and the bond you hold only gives 5%, but if the interest rate goes up by 6%, it feels bad. As you feel bad, in reality, the price has dropped. That's how you should see it. And the longer the maturity, like 5 years, 10 years, the longer it is, the better or worse it will be based on interest rate fluctuations. In fact, the price fluctuation range increases as the maturity lengthens.

It's very large, typically, a 10-year maturity bond is around 8 to 9. So, in the case of a 10-year maturity bond, if the interest rate drops by 1%, the price rises by about 8% to 9%. It feels good about that much. You can think like that. As the professor mentioned earlier, he talked about government bonds. There are various types of bonds, such as government bonds, corporate bonds, and company bonds. How do you classify them, and what types of bonds can individuals actually access? Types of bonds are broadly classified into two categories: who issued them and the maturity of the bond, whether it's a 1-year, 5-year, or 10-year bond. So, for example, if there is a 3-year bond issued by Bank A, then this is.

This is usually called a 3-year bond from a bank. So, there are two types of terms like that, and the bond name is called by the issuer. As you know, government bonds are bonds issued by the national government. Corporate bonds are issued by companies or corporations. Financial institutions like banks or credit card companies issue bonds, and many stock companies issue corporate bonds. Regional bonds are also important. When we buy a car, we briefly talk about bonds that we buy and sell. Regional bonds refer to when you buy a car in a specific region, like buying a car in Gyeonggi Province. If you go down to the local area to buy a car, you might get it cheaper. So, there are people like that, probably because the taxes are lower.

In the same way, in that area, in that manner, the regional system that issues like that, and when we acquire a house, this is a type of national debt, but when acquiring a house, um, also adding a digestion agent, it's called national housing bonds, we buy and sell them for a short period of time, like that. The national housing bonds, regional bonds, these two types of bonds that individuals, especially wealthy individuals, like a lot, the current market price is around 4%. It's around 4%. The issuance interest rate is quite low. The issuance interest rate is 1%. For example, when issuing like this, the interest income tax is 4%, so you receive 4% interest, but since the issuance interest rate is 1%, the interest income tax is only 1% per year, so the tax-saving effect is significant. That's why it's quite popular in that area, and the maturity is around 5 to 7 years.

As I mentioned earlier, because interest rates are falling, there is a considerable opportunity to profit from capital gains when interest rates fall. The liquidity is also quite good in that area. So, investors who anticipate interest rates to fall in the future might think, I bought it at 5% now, and I will sell it at 4% in a year. Individuals who invest with such thoughts tend to invest a lot in government housing bonds, local government bonds, and some national bonds. Now, because interest rates are high, companies are issuing corporate bonds, which are seemingly priced at a very high interest rate. So, many individuals are curious about whether it is okay to buy these. Many are wondering why these corporate bonds have high interest rates at the moment and how far it is okay to buy them.

Do you see it as a scam? In the case of a corporate structure, as I mentioned earlier, when the capital profit rate decreases, the profit we gain from that is lower than simply trying to invest in a high-interest rate, which many people invest in. The reason is that at the same maturity, depositing money in a bank for 1 or 2 years has the same maturity, but the interest rate on bank deposits is higher than that, so some people prefer to buy corporate bonds. If they do not fail until maturity, they can earn a higher interest rate than bank deposits. Many people invest in this way. However, we individuals have low credit ratings, so if we buy such insecure bonds, it would be difficult to sleep when there is just one piece of news in between. Because it's difficult, even if the interest rate is a bit insufficient, deposits are.

Interest rates are slightly higher than before, but even if they are not that high, do all companies receive credit ratings like single A or higher for their company cars? It is considered appropriate to invest in grades of single A or higher, but when investing in lower grades like triple B, you should study a lot. You need to analyze the company and make sure that there will be no problems until at least the maturity date. When you are confident that the rating will not drop, it seems okay to invest in such bonds. As Professor mentioned, there is a high possibility that the interest rates predicted by the whole world will soon decrease, which could lead to an increase in bond yields. Therefore, many people feel the need to study bonds. Surprisingly, there is a lot of information and books available on the stock market as well.

Recently, the professor has also been writing a book. When individuals study bonds, what aspects should they focus on? First, it would be good to have a basic understanding of the mechanism of bonds. For example, as I mentioned earlier, short-term bonds are actually quite similar in nature to deposits. However, medium to long-term bonds with maturities of 3 years, 5 years, 10 years, and so on, have different characteristics. It would be beneficial to study the characteristics of these bonds by maturity and type, and it would be good to invest after studying these aspects well. In the case of bonds, when you buy them and hold them until maturity or sell them, what kind of profit can you make? It would be good to study these aspects extensively.

Doing that is good. So, in bonds, unlike deposits, it's not just interest income, but interest income plus the profit and loss from interest rate fluctuations, uh, such profits and losses add up. In the case of overseas bonds, on top of that, there are profits and losses depending on the exchange rate fluctuations included in that concept. Understanding that well seems to be the most important. For example, in the case of short-term and long-term interest rates like in the U.S., there is a significant inversion. When this happens, it becomes a very unstable situation, so whether there is an economic recession or not, it is said that long-term interest rates should rise directly. Even though it has been inverted for a long time, it has been maintained, hasn't it? However, even so, even though interest rates are going down, even though the 30-year bond is maintaining around 4 point something.

It seems like the market is predicting that it will be maintained at a high level. How do you judge the current situation? With the medium to long-term interest rates currently inverted, the U.S. long-term interest rates are ultimately expected to align with the average forecast of long-term benchmark interest rates. Therefore, the interest rates in the U.S. are somewhat lower than the current benchmark interest rates. Consequently, it is inevitable that the interest rates will fall in the future. The reason for this decline is that the economy is expected to worsen compared to the current situation. The market predicts and analyzes this, indicating that the economy will deteriorate, leading to a continuous reduction in the benchmark interest rates in the long term. Therefore, long-term bonds should be somewhat lower than the benchmark interest rates. This consensus seems to be prevailing. I agree to some extent, however.

There won't be such a drastic thing as the country being down six times in a year, so if the long-term interest rate is around the high 4%, it's attractive, and not investing in anything below 4% is a bit risky. Or even if it's in the early 4%, I would be a bit negative about investing. That's how I think. And as the professor mentioned a while ago, it's predicted that our country's interest rate will continue to drop. If you think that the U.S. will maintain its interest rate at that level, in the past, our country's interest rate was coupled with the U.S. interest rate, being kept higher than the U.S. interest rate, but now it has been decoupled for a long time. In that case, assuming that our country's interest rate will also go down seems a bit hasty, don't you think?

What do you think? For example, in our country, like the United States, I express that now giving interest rates is like giving an economic painkiller. After the financial crisis, all countries that followed the United States were giving huge painkillers. Then they thought, If we keep going like this, everyone will die. Now, the United States just suddenly took out all the painkillers one day. They removed them completely, saying that having an interest rate of over 5% is the same. That's how I express it. In the case of Korea, if we take them all out like the United States did, we will all die. Because at that time, in our country, there are too many loans for real estate, too many. So, if we take them all out, it feels like we might die. Nevertheless, we have to take them out. So, they say, Then let's put one makeup on the painkiller every day.

Let's do it this way. Right now, in our country, the situation is like that. Even if the United States completely removes painkillers, patients walk around much better and feel better. So, at this point, we should consider giving painkillers at least once. But if we delay it, Korea might end up having to live on painkillers like in the old days. However, patients are now taking the lead. One more thing is, it's a bit, a bit, it's very difficult right now. They keep asking for more painkillers. However, in our country at this point, there is even greater expectation for a cut in interest rates compared to the United States. Yes, if we look at the interest rate level, it's about 3%. It seems that our experts and the media also have some responsibility.

I talk a lot. Yes, I think you talk too much. I think you talk too much. However, here in the U.S., because the U.S. is at a very high level, if you look at the fact that they temporarily put down interest rates, like the U.S. does with painkillers, saying they will put them down twice a day, when they lower the interest rates, it has a significantly more negative impact on the economy in the long term. I believe that the negative effects are greater. When I see this recent interest rate hike from a global perspective, it was an opportunity to prove the strength of each country. So, the U.S. is like, Let's try taking all the painkillers off, showing that they have made mistakes in their economic power. In reality, countries like Japan had a lot of yen recently, and then

I felt a bit tense because many capital market policies and some quite good policies that had not been implemented in the past were being introduced. Therefore, I was a bit nervous as Japan is improving a lot, but our country is relatively weakening. Seeing that they couldn't raise interest rates this time, I thought, Ah, Japan has finally become economically strong enough to survive without painkillers. I could feel that. Europe, even though I thought they couldn't endure it, they raised it a bit. Even though they raised it, they need to come down again somewhat like Korea. There are many discussions about this. Still, I think we can endure it to some extent, more than I thought, similar to Japan. I am thinking that our strength is a bit better than Japan's.

Japan has maintained very low interest rates for a long, long time. That's why countries like South Korea are also enduring a bit this time. However, it doesn't mean that interest rates should not be lowered at all. But, it is not good to operate the economic system by lowering interest rates as much as the market expects, like in the past, such as 1% or early 2%. It is not good for our future and a bit unfavorable. Therefore, I think it is better to find an appropriate level of interest rates around 2.5% for the future. As South Korea is aging, the elderly should increase the proportion of bonds rather than investing in stocks, as stocks have high volatility and are a bit risky. People in South Korea should increase the proportion of bonds in their assets.

In the portfolio, the bond allocation is excessively low. Usually, according to typical data, it should be around 3%. However, for comparison with advanced countries, it seems like it should be at a level of about 20%. Recently, Brazil's congress has been buying a lot of foreign bonds. Especially, due to the fact that Brazilian government bonds had over a 50% loss more than ten years ago, there are serious warning signs, yet despite that, there has been a lot of interest in foreign bonds recently. Comparing then and now, how much of a problem exists and what are your prospects for the future? In 2012, there was a Brazilian bond boom once. If we compare then and now, back then, the interest rates were...

However, it was 10% lower. So, 88% of the online lectures, that's about it. So, the interest rate itself wasn't that high. That was the first thing. And then, the second thing was that the exchange rate was too high. It was expensive. How do you predict exchange rates? Oh, we measure the value like the purchasing power parity. In 2012, the prices in Brazil were too high, so the exchange rate would weaken. The exchange rate was around 600 won at that time. And now, by around 2015, it was about 370 won. When it reached that point, I started investing. I started investing at that time. Well, at that time, the exchange rate was quite stable compared to other countries, as the prices were quite stable. As the exchange rate dropped, prices also became cheaper. So, with this stability, I thought I could endure the future prices.

In the competition of inflation, if it is sufficient, the bond interest rate of 13% at that time would be considered a level that can withstand this inflation. So, I started investing at that time with that thought. Therefore, in the case of last year, the exchange rate was 200 won, and the interest rate also went up to 13%, so my favorite exchange rate was too low, and the inflation rate in Brazil was okay, and the interest rate level was high, so I liked it very much. Therefore, I ended up investing a lot at that time. Now, as I continue to invest a bit and wait, the interest rate has dropped since then to around 10%. So, at that time, I just held onto it, and recently the interest rate has risen again to over 11%. The price I purchased yesterday is at 11.7%. If I invest 10,000 won in a 10-year bond at 11.7%, it will become 30,000 won after 10 years.

When you calculate the principal and interest with compound interest, it becomes 30,000 won. So, even if the current exchange rate is 270 won now, and it halves in 10 years, even in the worst-case scenario where it becomes 135 won, if I have 30,000 won, it will be halved to 15,000 won. Since it's 15,000 won, with a return rate of around 50% over 10 years, I think it's attractive enough. With that in mind, I decided to invest a bit more. As I mentioned earlier, the bond proportion in South Korea is very small compared to the asset size. What is the ideal portfolio weight in your opinion, Professor? Personally, as a value investor, I tend to invest more in the cheapest assets. So, I still think that recently, value is still the cheapest.

Due to that, there has been quite a significant increase. Nevertheless, domestic stocks are still considered the cheapest. For example, although they have risen a lot recently, banking stocks still offer an expected dividend yield of over 7%. This means that they are giving around 7% now, and it is said that in 10 years, it will be around 10% to 15% in comparison to your investment amount. Therefore, on average, the dividend yield over 10 years is around 10% in comparison to your investment amount. However, bond interest rates, specifically bank bond rates, are in the early 3%. When comparing like this, it is natural to increase the proportion of such stocks. That's how it is viewed. Bonds, on the other hand, are considered the most expensive in terms of domestic bonds. It is inherent in us. I think that the funds in our country are too much focused on banking or insurance sectors compared to other countries.

If you have a lot of funds, rather than investing in financial investments, there is a structure where there is a lot of investment in that area, so the interest rate level of long-term bonds can only be formed very low. That's why bonds in Korea are quite expensive, so it's better to look for some bonds that are good for us, such as the United States or Brazil. Therefore, I have about 20% or more of bonds like this, as I mentioned earlier, U.S. bonds, but as I mentioned earlier, depending on the interest rate, it's okay to be a bit more aggressive, around 4% or so. Brazilian bonds are also okay at the current interest rate level, so I hold at least around 20% of these bonds. I personally hold about 10% of them, but ordinary investors are okay to hold around 20% to 30% of bonds right now, that's how they think.

In an era of uncertainty, is bond investment safe? We examined bond investment from various angles, focusing on investment predictions, uncertainty, and the possibility of a monetary policy shift. We would like to thank Professor Seo Jun-sik for providing insights on differentiation. Thank you. Well-known in Wall Street for bonds, Bill Gross, mentioned in an interview that irrational exuberance is sweeping through the financial markets, stating that there is an oversupply of bonds, making bond investment unattractive. The currency policy, especially the US dollar, is in a situation where no clear direction reversal is evident. In a period where various uncertainties persist, we hope you maintain a sense of balance and establish asset strategies wisely. Thank you for the economic insights and issues discussed so far. Thank you.

[#경제와 이슈] 불확실성 시대, 채권 투자는 안전한가? | 57회 | 서준식 숭실대학교 교수 | 유효상 유니콘경영경제연구원 원장

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[#경제와 이슈] 불확실성 시대, 채권 투자는 안전한가? | 57회 | 서준식 숭실대학교 교수 | 유효상 유니콘경영경제연구원 원장

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